The Telegraph
Since 1st March, 1999
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- Sectoral shares and India's economic development

India is emerging as an IT giant even as farmers in Andhra Pradesh are ending their lives in economic despair. Common wisdom has it that growth of the services sector, of which information technology is an important constituent, is a harbinger of economic prosperity. Do the suicides in rural India reflect then a necessary evil that the country must bear with in its aggressive pursuit of material wellbeing' Or, put differently, have we cruised far enough on our voyage to discover the shores of prosperity'

Economists, from Adam Smith down to Simon Kuznets, charted out the precise sequence of steps an economy follows in its quest for development. First comes the growth of the food sector, without which few societies can survive. The insatiable thirst for wellbeing, however, causes individuals to cast coveting glances beyond their larders once the stomach is appeased. They pine for dining tables to eat their meals from, for automobiles to drive them to the theatre. To fulfil these desires, farmers produce more than what is required to keep them alive. The surplus serves to support their demand for industrial products and the emergence of industry represents the second step towards development.

An average industrial production process is more intricate than a typical agricultural activity involving the sowing of seeds and the reaping of a harvest. Each new product is the result of a new invention and, human ingenuity being boundless, there is literally no end to the maze of complexity that industrial processes might involve. Thus, as an economy ascends the development ladder, the industrial sector grows relative to agriculture through the creation of ever- expanding brands of products.

The comparative decline in the size of agriculture accelerates further with the arrival of the service sector, which constitutes the third and final phase of development. Services satisfy the broadest spectrum of human wants, starting from basics, such as haircuts, and carrying across to the exotic, such as pleasure trips into outer space. Like industry, services too hold the potential for limitless diversity and the richer a nation the greater is the variation in the range of services its population enjoys.

Thus, the path to economic development is characterized by a change in the composition of aggregate output, with a decline in the share of agriculture and the rise of industry to begin with, and then a boost in the services share at the cost of industry further on.

Where does India stand in the evolutionary drama' Comparable cross-country data (for 2002) throws light on the issue. In terms of industrial share, India is comfortably close to the richest of countries, but it is within crying distance of Uganda too, which would hardly be identified as advanced. The share of the Indian service sector also calls for commendation, but so do the corresponding sectors in Ethiopia and Uganda. On the agricultural front, however, things are remarkably different. India, though better off than the poorer countries, is miles away from the rich ones.

The table tempts one to speculate. If India were to increase its share of the services sector by around 20 percentage points at the expense of a corresponding reduction in the share of the agricultural sector, we would land delightfully close to the state of things in the American economy. Is there a foolproof strategy for achieving that end' The answer, quite obviously, is far less than straightforward, for development is a perplex historical process. Nonetheless, the cross-sectional scenario presented by the graphic above could provide a possible insight into the course of history. All we need to do is rank the eco- nomies in terms of their per capita GDPs and identify the ones with low figures as representing early stages of development, and those with higher values as being more advanced. Once we do this, the Chinese case captures our attention. If China is considered notches higher than India in the scale of economic development, then the composition of its sectoral shares too would appear to exhibit a higher echelon in economic evolution compared to India. Going by this hypothesis, what one needs in India is a 20 percentage points rise, not of services, but of industry.

As already noted, the story of economic development requires that, to start with, the industrial share must grow at the cost of agriculture. Only when this transformation has pushed industry to a peak would services be poised proper for expansion. And the expansion will be at the cost of a decline in the share of industry, not agriculture, from the aforementioned peak.

The dynamics of shares cannot be the only clue to the causes underlying economic progress. It must be accompanied by quantum rises in the aggregate value of the GDP for economic development to take a firm hold. Consequently, the total value of services should be substantial in an economy that counts as developed. This, however, can happen only if the size of industrial production is large too, since the provision of the most sophisticated forms of services is likely to be concentrated around industrial centres.

India's relative performance in this connection may be judged by applying the percentages reported in the table to the aggregate GDPs. Despite the smaller share compared to India, the value of services generated by China was approximately $430,457 million in 2002, whereas India's service sector produced only $260,190 m. It would seem then that the absolute level of industrial development in India falls short of what is necessary to justify a significantly large service sector.

On the other hand, even though Indian agriculture continues to be dictated by the vagaries of the monsoon and irrigation facilities fall hopelessly short of expectations, an all-too-glaring macro-fact is that modern India is self-sufficient in food supply. Once again, a share of 23 per cent in 2002 translates to an aggregate of approximately $1,17,340 m for Indian agriculture. By striking contrast, the approximate agricultural produce of Japan and the United Kingdom were lower at $39,934 m and $ 15,662 m respectively. This will unmistakably be recognized as a major achievement of the planning era, which began with a failure of the second five-year plan on account of inadequate treatment of agriculture. The industrial take-off it envisaged on the basis of surplus labour from the agricultural sector was unsuccessful since India was still far from producing an adequate quantum of food.

Paradoxically enough, the message of the second five-year plan has failed to impress precisely when it has begun to matter. The rural economy is still replete with unemployed labour that industry may cheaply absorb. At the same time, the supply of food no longer poses a constraint. Admittedly, now that markets, rather than planners, are expected to provide the right incentives for industrial growth, the availability of resources alone does not ensure that industries thrive. The continued recession in the world economy makes it difficult for the government to design correct policy packages for the industrial sector.

On the other hand, so long as industry hesitates and agriculture keeps offering a surplus, one expects the average price of industrial goods relative to agricultural products to move against farming interests. How intensely this affects individual members of the rural economy is difficult to verify. The poorer ones might well resort to suicide. But it is unlikely that these events drive governments out of power. It is only in the presence of strong farmers' lobbies, concerted efforts initiated by the richer elements, that a government is unseated.

To view such incidents as a fallout of India's failed policies may well amount to barking up the wrong tree. Unless the missing links between our perceived agricultural woes on the one hand and the much-flaunted service-led euphoria on the other are adequately bridged, India's development scenario is bound to remain obscure.

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